The dancer

Today, I would like to relate how Nicolas Darvas, a professional dancer, managed to grow a stake of $36,000 into more than $2 million over three years in the 1950s. Amazingly, he managed to make this fortune in the markets while away from Wall Street on a worldwide dance tour, relying solely on Barron’s, a weekly financial newspaper, and telegrams (the main means of communication in those days) to/from his broker to get quotes and place orders.

His approach was quite unusual. Firstly, he concentrated exclusively on stocks hitting new all time highs. Secondly, among these stocks he looked to buy those in the industries of tomorrow (those with real growth potential ). As he said himself, ‘What I had to do was to find stocks that would be hoisted up because they stirred people’s imagination for the future.’ Today, he might be interested in stocks in the cloud computing or social networking space.

The Darvas Box

In his research on stock price movements, Darvas discovered that stocks in an up trend have a peculiar pattern, a rhythm that can be observed and used to time one’s stock purchases. What Darvas observed was that stocks trending up typically advance for a while, then stall and consolidate, then advance again. He called this stalling and consolidation process ‘forming a box’. For example, a stock might have the following daily closing price pattern:

$22, $25, $24, $26, $27, $30, $29, $29,$28, $27, $28, $29, $29.

The top of the box is formed when the stock reaches a high – $30 in this case- and does not breach this level for three consecutive days. In this example, after it hit $30, it traded below that level for three consecutive days, so $30 was the top. After the top of a box is formed, the bottom is formed when the stock establishes a low and does not break below this level for three consecutive days. In our example, the stock fell to $27 and this level was not breached for three days, so $27 is the bottom of the box. Darvas would call this a $27/30 box.

$30 Buy above this level

$27 Sell below this level

Once a box is formed, a break out above the upper line of the box is a buy signal. A drop below the bottom of the box is a sell signal, as this indicates that the stock’s trend has changed. He would continue to buy as the stock advanced from box to box.

Following his success on the markets, Darvas decided to take a break from dancing and base himself in an office near Wall Street. He believed that if he devoted all his energies to the market he would become enormously wealthy. To his surprise, his investment performance deteriorated. He found he was too close to the action and was being overly influenced by market news and sentiment on the street. He was not sticking to his system. He concluded that being removed from the market was an advantage. His book ‘How I Made $2,000,000 in the Stock Market’ is well worth a read.

For those interested in the markets, I will be running an evening course titled ‘A practical guide to investing’ on Tuesdays for seven weeks in GMIT, starting Tuesday 25 September. If you wish to book a place, contact GMIT at 091-742145 or email lifelonglearning@gmit.ie.